Tapping 401(k)s to recover from Sandy

The Internal Revenue Service is offering some relief for victims of Hurricane Sandy: Those who need to take a loan or “hardship distribution” from a retirement plan can do so without the red tape they might otherwise encounter—and with less damage than usual to their overall savings strategy.

Reuters

Under the relief plan the IRS announced on Friday, “qualified employer plans,” including 401(k), 403(b) and 457 retirement plans, can make loans or hardship distributions to account-holders without first assembling the documentation they might normally require. Instead, the IRS is letting borrowers and plans cobble the paperwork together after the fact.

Tapping a nest egg for a hardship distribution isn’t a move to be taken lightly. Such withdrawals are generally taxable and a 10% penalty applies when the account owner is age 59 ½ or younger. For taxpayers who want to avoid that hit, the loan may be the better deal. The borrower is still making a dent in his or her savings, but provided that loan is repaid within five years, the proceeds are tax-free. After taking a hardship distribution, 401(k) and 403(b) participants are normally barred from making new contributions for six months. But for Sandy victims, the IRS is suspending the contribution ban.

The agency is also letting some plans that don’t normally allow hardship distributions make an exception for Sandy victims. In addition, while IRS rules typically restrict hardship distributions to a short list of major costs including unreimbursed medical expenses and the purchase of a home, Sandy victims can use the funds for a broader array of purposes, including buying food and paying for shelter while waiting for repairs.

A hardship distribution must be made by Feb. 1, 2013. To qualify for an expedited loan or hardship distribution, a person must live in a federally-declared disaster area or be using the money to help a child, parent, grandparent or other dependent who lives or works in the disaster area.

Copyright 2015 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of
this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones
Reprints at 1-800-843-0008 or visit